An analysis of BP's recent results.
BP’s share price surpasses 2014 highs as profits rise 71% in first quarter
According to BP’s management, the group had its best quarter since 2014 as underlying replacement cost profit rose by 71% to $2.6bn. The group’s upstream division had its best performance since the last time oil prices were above $100 a barrel as production increased to 3.7m boe, up 6% compared to the same period last year. These numbers were driven by the ramp up of new projects and plant reliability. Average realised oil prices of around $67 a barrel, much higher than in 2017, was also of major help. Investors should also appreciate that in its refining business, the company seems to have done well too, at a time when the industry as a whole is facing challenging conditions.
Production figures from the Upstream, Downstream and even Rosneft which prior to this quarter was a relative poor performer, were all ahead of expectations and has sent BP’s share price this morning higher by a couple of percentage points. More importantly, the share price has now easily surpassed the highs of 2014 before the time when oil started its slide from $100 a barrel. This reflects the drastic changes that oil majors such as BP have made in offloading low returning assets, cutting costs and capital expenditures.
With these changes, better balance sheets and the improving demand for oil as the major global economies experience synchronised growth, the big oil giants are feeling much more confident about the future and subsequently, investment into major projects has become a feature again. BP’s Atoll project in Egypt has started production during the quarter and it has made final investment decisions on four other projects in Oman, India and the North Sea.
However, these investments will challenge the oil producer’s target of keeping gearing at between 20-30%. Currently this stands at 28%, near the upper end which during the quarter was driven up by increases in working capital and ongoing payments related to the Gulf of Mexico disaster.
The quarterly dividend has been maintained at 10c, giving investors an attractive yield of in excess of 5%. We have conserved the two large integrated oil companies on our ‘buy’ list even through the oil price trough as we firmly believed in the benefits of their cost cutting and restructuring efforts. These actions are paying off for investors and we believe that the improving oil price scenario aided by lower costs can only be good news into the medium to long term. We therefore maintain our ‘buy’ recommendation on BP, as well as Royal Dutch Shell for investors seeking a balanced return and willing to accept a low to medium level of risk.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.